1) Due to excellent performance over the past year, the board of your hedge fund has elected to award you a free month-long holiday in Hawaii for you and your family. The aeroplane and hotel bookings are non-transferable, non-saleable and non-refundable.

However, you and your partner are hobbyist astronomers and you just heard that a solar eclipse will be visible from the Antarctic waters on a cruise ship that same month. Holidaying on the Antarctic cruise ship is your next best alternative to Hawaii.

The Antarctic cruise ship family trip costs $20,000, though you'd be prepared to pay up to $30,000.

Ignore all other costs of taking a vacation in Antarctica or Hawaii. Based on this information, what is the opportunity cost of holidaying in Hawaii rather than Antarctica?

Select one:

a. $0

b.$10,000

c.$20,000

d.$30,000

e.$40,000 2)In the following quote, Angel (2021) gives an example of a short seller, who borrows shares and sells them, and how their collateral requirements change as the share price rises and falls:

For example, suppose that a short seller decides to short Pump&Dump.com which sells for $100 per share. They borrow shares from Friendly Index Fund and sell them. As part of the stock loan agreement, the short has to put up 102% of the value of the borrowed shares, or $102. On the settlement day, the shorts put up as collateral the $100 proceeds of the sale and $2.00 of their own cash. This collateral amount is adjusted every day. If the stock goes up by $100 to $200 per share, the shorts have to put up another $102 per share in cash as collateral for the increased value of the shares that they owe. However, if the stock drops to $1.00, the collateral amount drops to $1.02. The shorts would get a cash refund of $100.98 of the collateral. (Page 15, Angel, 2021)

Which of the following statements about this scenario is NOT correct? When the stock price is $100, the short-seller's:

Select one:

a.Asset is the $2 cash collateral.

b.Liability is the $100 stock.

c.The debt-to-assets ratio is 98.039215686% (=100/102).

d.The debt-to-equity ratio is 5000% (=100/2).

e.The asset-to-equity ratio is 5100% (=102/2). 3)In the following quote, Angel (2021) gives an example of a short seller, who borrows shares and sells them, and how their collateral requirements change as the share price rises and falls:

For example, suppose that a short seller decides to short Pump&Dump.com which sells for $100 per share. They borrow shares from Friendly Index Fund and sell them. As part of the stock loan agreement, the short has to put up 102% of the value of the borrowed shares, or $102. On the settlement day, the shorts put up as collateral the $100 proceeds of the sale and $2.00 of their own cash. This collateral amount is adjusted every day. If the stock goes up by $100 to $200 per share, the shorts have to put up another $102 per share in cash as collateral for the increased value of the shares that they owe. However, if the stock drops to $1.00, the collateral amount drops to $1.02. The shorts would get a cash refund of $100.98 of the collateral. (Page 15, Angel, 2021).

Which of the following statements about this scenario is NOT correct? If the share price suddenly rises from $100 to $150, the short seller will:

Select one:

a.Have made a loss of $50.

b.Have an unrealised return on their equity (net wealth) of -50% (note the negative sign) over that short time.

c.Have to hand over $51 (=$50*(1+0.02)) in cash collateral.

d.Have a new debt-to-assets ratio of 98.039215686& (=150/153). 4)Angel (2021) says that a short squeeze was responsible for the dramatic GameStop share price appreciation in January 2021. A short squeeze occurs when:

Select one:

a.Short sellers are forced to buy stock.

b.Short sellers are forced to sell stock.

c.Stock lenders are forced to buy stock.

d.Stock lenders are forced to sell stock. 5)On 15 June 2021, AFR journalist Alex Gluyas wrote that Magellan fund manager Vihari Ross "isnt troubled by the brief spike in inflation occurring across economies, instead viewing it as a chance to buy undervalued sectors." Vihari Ross says: If you have the view of low real growth, low inflation over time and therefore lower rates, then whats happening around this current volatility is genuine valuation opportunities opening up in long-duration growth assets. The defensive contributors to your portfolio such as utilities, and consumer staples in particular, their relative valuations look the best they have in years.

Which of the following steps in Vihari Ross's thinking would she disagree with? In other words, which step is incorrect or inconsistent with her opinion?

Select one:

a.Investors fear higher inflation amid supply bottlenecks, pent-up demand, easy monetary conditions and large fiscal stimuli as the COVID-19 pandemic subsides and world GDP rebounds strongly in mid-2021.

b.Higher expected inflation has triggered fears that central banks will raise interest rates sooner, leading to price falls in long duration assets.

c.Unlike the broader market, Ross believes in 'secular stagnation' where ageing populations have led to a glut of savings and lower expected GDP growth, inflation and interest rates.

d.If the higher inflation is only temporary, unlike market participants believe, then long-duration assets are currently underpriced.

e.Long duration assets often have high required returns, such as electrical utilities and supermarket grocery stores (consumer staples).

6)A stock has a beta of 0.5. Its next dividend is expected to be $3, paid one year from now. Dividends are expected to be paid annually and grow by 2% pa forever. Treasury bonds yield 3% pa and the market risk premium (MRP) is 6% pa. All returns are effective annual rates.

Which of the following statements is NOT correct?

Select one:

a.6% pa is the stock's required return.

b.$75 is the stock's fair price.

c.26.5 years is the stock's Macaulay duration.

d.If the market portfolio were to fall 1% today, the stock is expected to fall by 0.5%.

e.If the Treasury bond yield were to fall 1 percentage point today, then the stock price is expected to fall by 26.5% approximately, ceteris paribus.

7)This question is based on Damodarans The Promise and Peril of Real Options Home Depot example on page 45 and 46. The numerical details are unchanged so you can skip reading them if desired.

Suppose that Wesfarmers is considering opening new Bunnings hardware stores in South America.

Rather than going all in, they're thinking of outlaying $100m CapEx to open a small number of stores to test their innovative new format. The small trial is only expected to make an $80m present value of cash flows after the initial CapEx, totalling a negative $20m (=-100+80) NPV.

However, if things go better than expected, a bigger store rollout can be launched 5 years later for $200m CapEx. This big launch is not planned immediately since it's expected to make a $150m present value of cash flows after the initial CapEx, totalling a negative $50m (=-200+150) NPV.

But there's volatility in the present value of future cash flows from the big expansion. It could be greater or less than $150m and its proportional volatility (standard deviation of returns) is 28.28427% pa. The risk free rate is 6% pa.

Which of the following statements is NOT correct?

Select one:

a.The big project is an expansion option best modelled as an in-the-money call option.

b.The risk-neutral probability that the big project will be launched in 5 years is 38.3328%.

c.A $1 increase in the present value of the big project's expected cash flows now will lead to a $0.631453 increase in the current real option value.

d.The big project's current option value is $37.9227m, so the NPV of the small project including the option value of the big project is $17.9227m. 8)Below is a quote and table showing Latanes (1959) re-interpretation of Bernoullis original example of a poor man thinking of selling a lottery ticket that he found to a rich man:

Somehow a very poor fellow [with one thousand ducats] obtains a lottery ticket that will yield with equal probability either nothing or twenty thousand ducats.

Will this man evaluate his chances of winning at ten thousand ducats?

Would he not be ill-advised to sell this lottery ticket for nine thousand ducats? To me it seems that the answer is in the negative.

On the other hand I am inclined to believe that a rich man [with one hundred thousand ducats] would be ill-advised to refuse to buy the lottery ticket for nine thousand ducats.

If I am not wrong then it seems clear that all men cannot use the same rule to evaluate the gamble.

Latane and Bernoulli's Rich and Poor Men
A poor man with $1k finds a lottery ticket paying $20k with 50% probability. A rich man with $100k offers him $9k for the ticket. Would they transact?
	Initial wealth	Wealth if lottery ticket:		Gross discrete return (GDR) if lottery ticket:		AAGDR	GAGDR
		Wins (50%)	Loses (50%)	Wins (50%)	Loses (50%)
Poor man:	10
Holds ticket		21	1	2.1	0.1	(a)	(c)
Sells ticket		10	10	1	1	(a)	(c)
Rich man:	100
Buys ticket		111	91	1.11	0.91	(b)	(d)
Doesn't buy ticket		100	100	1	1	(b)	(d)

Which of the following statements is NOT correct?

Select one:

a.If the poor man uses the arithmetic average gross discrete return (AAGDR) rule to guide his decisions, he would hold the ticket to achieve a 1.1 AAGDR rather than sell it which achieves a 1 AAGDR.

b.If the rich man uses the AAGDR rule to guide his decisions, he would buy the ticket to achieve a 1.01 AAGDR rather than not buy it which achieves a 1 AAGDR.

c.If the poor man uses the geometric average gross discrete return (GAGDR) rule to guide his decisions, he would sell the ticket to achieve a 1 GAGDR rather than hold it to achieve a 0.458257569 GAGDR.

d.If the rich man uses the geometric average gross discrete return (GAGDR) rule to guide his decisions, he would not buy the ticket to achieve a 1 GAGDR rather than buy it which achieves a 0.252525253 GAGDR.

e.An investor with a log utility function will make the same decisions as an investor maximising the geometric average gross discrete return since the arithmetic average of the logarithm of the gross discrete returns (AALGDR) is equal to the logarithm of the geometric average gross discrete returns (LGAGDR).